What’s the Difference Between Market, Limit and Stop Orders?

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Since different types of stock market orders can lead to different results, it’s imperative to know what differentiates them from each other. Market, limit and stop orders are the three types of stock market orders this guide covers.

Each type is a distinct tool that helps you manage your stocks according to your goals. Here’s how they compare to each other.

What Is a Market Order?

A market order is an order to buy or sell some quantity of stock as soon as that order is received by the broker. This order type is the default setting when a new account is opened with a broker and can be changed after the account has been opened.

With electronic communication networks, stocks may be available at different prices from several dealers simultaneously, and with a market order, brokers will execute orders at whatever price they are received.

How To Use It

Typically, you should place a market order during standard market hours. Otherwise, the order is executed whenever the market opens next, which could lead to fluctuations from the market’s previous close.

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Some other factors that can impact the price of a stock amid market sessions are earnings releases, new economic data, unexpected events or company news.

What Is a Limit Order?

A limit order is a type of order to buy or sell a stock at a specific price, known as the “limit price.” A limit order to buy can only execute at the limit price or lower, and a limit order to sell can only execute at the limit price or higher.

How To Use It

If you place an order with your online broker that is not immediately matched by another trader’s market order, it becomes a limit order.

For example, if you want to buy a share at $200 or less, your order won’t be filled until this price is available.

What Is a Stop Order?

Stop orders are based on prices that are not yet available in the market. Once the price is available, the order is triggered.

In its most common form, the stop order is “Sell at Stop (Stop-Loss)” and is used by investors to limit their losses on an investment.

How To Use It

You should use a stop order in one of the two situations, as noted by Charles Schwab:

  • When your stock has risen and you wish to preserve your gains in case the price starts falling again.
  • When you intend to purchase a stock once it has passed a particular value because you believe it will keep rising.

Example

For instance, a seller may set the stop order at $100 for a stock currently trading at $110. They might be expecting the stock to rise but are not ready to face any losses if the stock goes below $100.

With the stop order in place, if the stock dips and reaches $100, it will automatically be sold. Conversely, a buyer may have set a stop order to purchase the stock when it rises to $100. In that case, their order will be triggered as soon as the stock price goes up to $100.

Market Order vs. Limit Order: Which Approach Is Better?

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Market orders allow buyers to purchase a stock at its current market value. They’re the most common type of order.

For instance, if the current price of a stock is $10 and you place a market order, you will buy the stock for $10 unless you place the order after trading hours, in which case it will be traded at the price when the market opens the next day.

Meanwhile, a limit order is a more controlled approach. You can set the maximum and minimum purchase or selling price. For instance, if a stock you hold is currently being traded at $100, you can place a limit order for it to be sold at $110.

Similarly, if you’re eyeing a stock worth $120, but you don’t want to purchase it at that price, you can set a limit order to buy the stock as soon as it hits $100. Keeping this market order vs. limit order comparison in mind, you can determine which approach is ideal for your portfolio.

Stop Order vs. Limit Order: What’s the Difference?

Stop orders and limit orders can be used when buying or selling. The reasoning behind placing each type is slightly different, and so are the instructions for doing so. Each comes with its own disadvantages, too.

Features Stop Order Limit Order
Intent It limits losses by putting a ceiling on the potential loss an investor may suffer if the stock moves in the opposite direction of what the investor desired. It allows investors to lock in prices they prefer since these orders are guaranteed to execute at a specific price (or better). 
Disadvantages Short-term fluctuations trigger stop orders. Plus, it’s likely for the trade price to be lower than the stop price. A limit order is not executed if the stock does not reach the limit price.
Instructions
  • Sell/buy when the price goes beyond a particular target.
  • For buy orders, purchase if the price goes over $X.
  • For selling orders, sell if the price goes below $X.
  • Sell/buy at a price equal to $X or better.
  • For buy orders, purchase the stock at $X or lower.
  • For selling orders, sell the stock at $X or higher.

 Suppose a stock is currently trading at $100. If you want to buy it, set the limit order to wait for a price dip to purchase the stock. So, if it goes to $80, buy it.

 Meanwhile, the stop order is placed when you’re waiting for a price dip, but the stock could also rise, and you don’t want to miss out on it since that would be a loss. So, your stop order will be set to buy the stock if it goes to $110.

 When selling, the scenarios are as such:

  • Limit order: You purchased the stock at $100 and are waiting for a price rise to sell it. So, sell the stock if the price goes to $120.
  • Stop order: You purchased the stock at $100 and are waiting for a price rise, but the price can also fall. Since you want to limit your losses, sell the stock if it reaches $90.

What Are Price Gaps?

A price gap refers to the sharp upward or downward changes in stocks from the end of one trading day to the beginning of the next, with no trading taking place in between.  

Investors will often scan for stocks with substantial gaps between the opening and closing prices to catch possible buy or sell opportunities that are not currently reflected in the stock’s price.

Suppose a stock is priced at $47 at the time of market close, and you set a limit order to sell at the price of $55. When the market opens, the stock is at $65 due to economic data or positive news.

In this situation, the trade will be executed at $65, higher than the expected price, being more profitable for the seller. Thus, gap ups can give investors higher prices on limit orders.

On the other hand, let’s say you have placed a stop order at $29 for a stock of the same price — the stock gaps down to $25 between the market’s next close and opening. Thus, the trade will be executed at $25 at the market’s opening, leading to a larger-than-expected loss for the seller.

Good To Know

Keep your eyes and ears open for news releases, earnings announcements and changes in the financial landscape since these events trigger price gaps. Also, read analysts’ reports regularly to be aware of any upcoming forecasted price gaps. Doing so will help you make sound financial decisions.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Scott Jeffries is a seasoned technology professional based in Florida. He writes on the topics of business, technology, digital marketing and personal finance. After earning his bachelor’s in Management Information Systems with a minor in Business, Scott spent 15 years working in technology. He's helped startups to Fortune 100 companies bring software products to life. When he's not writing or building software, Scott can be found reading or spending time outside with his kids.

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